S&P Wins Transfer of Ratings Lawsuits by States to Federal Court in New York

Standard & Poor’s and its parent company McGraw Hill Financial Inc. on Thursday won a ruling that moves 15 lawsuits in which they were accused of fraudulently inflating credit ratings to a single federal court.

The U.S. Judicial Panel on Multidistrict Litigation said it would promote efficiency to move the lawsuits by 14 U.S. states and Washington, D.C. to a federal court in New York, where they will be overseen by U.S. District Judge Jesse Furman.

It rejected the states’ arguments that moving the lawsuits to New York, where McGraw Hill is based, would be inconvenient for them and was unnecessary in light of the historic cooperation among state attorneys general.

“Even though we have never centralized litigation comprised solely of sovereign enforcement actions such as these, centralization is appropriate in light of the significant factual overlap,” the six-judge panel said.

“The inconvenience to S&P of litigating in numerous different districts, as well as state courts, is high, and centralization allows for all parties to obtain substantial efficiencies in dealing with common issues,” it added.

Most of the lawsuits were filed on the same day in February that the U.S. Department of Justice hit Standard & Poor’s with its own $5 billion lawsuit, which is being overseen in Los Angeles federal court.

The lawsuits generally accuse S&P of inflating ratings on structured finance securities to win more business from issuers, while touting its ratings independence and objectivity.

Many of the challenged ratings were for collateralized debt obligations and other mortgage-backed securities whose value plunged during the housing and credit crises.

S&P, represented by prominent First Amendment lawyer Floyd Abrams, has said in court papers that the state lawsuits raised significant regulatory and constitutional issues to justify consolidating them.

EXTRAORDINARY MOVE

The lawsuits being moved were filed in Arizona, Arkansas, Colorado, Delaware, the District of Columbia, Idaho, Iowa, Maine, Mississippi, Missouri, North Carolina, Pennsylvania, South Carolina, Tennessee and Washington.

Consolidating them may limit the potential for S&P to face multiple financial judgments or conflicting court rulings that the rating agency has said could impede its ability to function.

The multidistrict litigation panel did not decide whether the states’ cases must stay in federal court, leaving open the possibility for future jurisdictional challenges.

“It does seem extraordinary to me to consolidate state enforcement actions in federal court,” said Gil Seinfeld, a University of Michigan law professor specializing in federal courts and jurisdiction. “These state attorneys general are not going to be able to litigate in their backyard where they may be more familiar, and consolidation reduces logistical, management and cost burdens for S&P.”

Gregory Strong, a Delaware deputy attorney general who helped lead the states’ case, did not immediately respond to a request for comment.

S&P in a statement said it is pleased with the decision.

MOODY’S NOT FACING SIMILAR FEDERAL LAWSUIT

The federal lawsuit was filed under the Financial Institutions Reform, Recovery, and Enforcement Act, adopted following the 1980s savings-and-loan crisis.

S&P has called that lawsuit meritless. It also faces ratings lawsuits in California, Connecticut and Illinois state courts, which are not being consolidated.

The rating agency’s main rivals, Moody’s Corp.’s Moody’s Investors Service and Fimalac SA’s Fitch Ratings, were not hit with similar federal lawsuits.

Moody’s is a defendant in the Mississippi lawsuit, and the panel rejected its request to separate its part of that case.

McGraw Hill was renamed in March after selling its education business to Apollo Global Management LLC. Shares of the former McGraw-Hill Cos. fell 26.9 percent in the week when the U.S. lawsuit and most of the state lawsuits were announced.

In afternoon trading, McGraw Hill shares were up 5 cents at $53.85 on the New York Stock Exchange.